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real estate investing or buying a franchise?

ottawaman

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Hello again everyone.



I recently made a trip to the bank and came out with a possible 700k loan for a mortgage (new house). Seriously, for 700K, I can buy a Tim Hortons franchise or any other business franchises.



I am now torn between using this money for a new house (or anything related to real estate investing) or buying a stable franchise like Tim Hortons.



Just curious, what would you consider (or do) if you were in my shoes?



Am I comparing apples to oranges or not? Any comments appreciated.
 

Rickson9

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If you are unable to determine the relative ROI of each opportunity perhaps you should probably avoid doing either. Just a thought.
 

MaximeValmont

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Hey Ottawaman,









Glad to hear you can get a 700 000 loan from the bank!









However, There is a huge difference between a real estate investment and buying a franchise.









First of all, the bank wanted to lend you 700 000 to buy a HOUSE right? It doesn't mean they would lend you 700 000$ to buy a franchise at ALL. That's a big difference.









By lending you 700 000$ for a house, the bank have a House as a collateral. By giving you 700 000$ to by a franchise, they have NOTHING. If you buy a Mc donald Franchise ( 1million + by the way), you probably won't even own the building and the land. You'll only own a % of this particular McDonald.









The success of the Mc Donald is going to be largely dependant on your skills as a managers too. The bank Doesn't know if you are going to make money in 3 years at all. They can't invest in that, there is not even a cashflow yet.














Plus, some Franchise recquire a solid background as a manager. You can't just decide to open a franchise like that. There is a huge process, lots of contracts to sign etc etc.









You'll also recquire a Cashdown way higher than for a house for a franchise in most case.









The bottom line is this : It's two different world. You are a real estate investor ot a manager?









People that Open franchise are often more Manager than Entrepreneurs. Real estate investors are entrepreneurs.














Valmont.
 

Thomas Beyer

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Interesting .. I had very similar thoughts a few years ago. (UPS Stroe, M&Ms, East Side Mario's, ..)



I decided not to go the franchise route.



Some, but not all, franchise are big money makers, to the tune of 12-25% on the money invested annually .. BUT: they require a significant time commitment and frequently 700K is not enough to buy the franchise and the underlying real estate. It may require $1.5M, 50% in cash. Plus you have severe personal covenants that will bankrupt you if business is unsuccessful.



You also have to deal with large number of unskilled or semi skilled labour, with high turnover. If you love that, great. Or if the business is lareg enough you can hire a manager for $80-100K: even better. Still, many franchises require you to be active in the business as they know that that is critical to success.



So, you're buying yourself a high stress job. I was looking for an investment primarily.



Also, you have now 3 bosses:

a) the franchisor, charging you X $s a month or Y % of gross revenue, usually with a personal guarantee

b) the bank, lending you money at Z %, usually with personal guarantees

c) the landlord whom you lease the premises from, usually with personal guarantees



A franchise is far less liquid than real estate.



With 700 cash you can buy a multi-family asset for around $2.5M to $3.0M with a very similar return on the cash, but usually with less time commitment, and it is far more scalable. I decided to go that route.



I would certainly check it out as it may match your personality profile, such as working 100h weeks in the first few months, then only 60-80 for a year or so .. then maybe 40. Vacations: not the first 2-3 years until all is stable and 2-3 key managers are in place.
 

Sherilynn

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Location is a huge factor as well, and affects the business in more ways than you might think.



For example, the first Tim Horton's in Fort McMurray had 50 car lineups every morning when I lived up there. The cars came all the way down the street and blocked the highway. It was obvious that another Tim Horton's location could be added and both could make huge sales.



But at the same time, Fort Mac had a huge labour shortage, especially in the service industry. So you would have huge potential sales, but no staff to run the place. And when you are the manager, you have the supreme pleasure of picking up the slack. For every shift that you can't fill or for everyone that phones in sick at the last minute, you get to don the hat and make the coffee. (Or flip the burgers, or whatever the case may be.)



If you took the same money and bought rental properties in Fort Mac during that same time period, you would have tenants lined up to fill the suites. You likely would have had difficulty finding contractors to complete repairs and upgrades, but usually these aren't an emergency anyway (unlike Tim Horton's early morning shift). My point is that the potential for profit can be just as good with real estate, but things tend to be a little calmer than managing a business with a storefront.



Here's a thought...work towards owning the real estate that the Tim Horton's franchise rents!
 

MaximeValmont

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Wow but whait a minute Sherilynn ! I agree with everything you just said, but let's not forget something here;











The Franchise in Fort Mc would cost a LOT of money! Not every franchise cost the same. And someone that want to open a franchise can't choose the location. You can say to them " Well, I would like to open a franchise in calgary", but that's it. There is no way you can choose the location.











That's why people buy franchise ! They don't have to do marketing, they don't have to do research to know which location is the best, etc etc.











Just wanted to make this clear. I agree with you with all the rest.

















Valmont
 

Sherilynn

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[quote user=maximevalmont]

The Franchise in Fort Mc would cost a LOT of money! Not every franchise cost the same. And someone that want to open a franchise can't choose the location. You can say to them " Well, I would like to open a franchise in calgary", but that's it. There is no way you can choose the location.




Yes, but Real Estate in Fort Mac also costs a lot of money. So it's apples to apples in that respect.



And I meant location in the broadest sense. Anywhere in Fort Mac would have been ideal for another Tim's, if one could find (and afford) the staff. My point is that many people would look at the lineups and think it was a goldmine, and neglect to consider the other factors that result from the economy of the location (town/city, neighbourhood).



But you brought up another franchise downside when it comes to location within the neighbourhood...yes, you have no choice; and there is nothing stopping the franchise owner from allowing another franchise immediately outside your non-competition boundary.



In Edmonton there has been a Boston Pizza at 118th and 101 Street for a very long time. A couple of weeks ago another one opened at Kingsway Mall (118th and 106 Street). This BP is in the Mall parking lot and immediately beside the LRT expansion. This location will be a gold mine. But what about the older location 5 blocks away???
 

ottawaman

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Thank you all very much for the insights.



Putting up a Tim Hortons franchise has been one of my dreams but I do know its a lot of work. Investing that money in real estate is also a priority but I think that Ottawa (although a very stable and nice city) would not give me a good ROI for my borrowed money.



Having said all of this, thanks again for all the intelligent advices.
 

bizaro86

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[quote user=ottawaman]Putting up a Tim Hortons franchise has been one of my dreams but I do know its a lot of work. Investing that money in real estate is also a priority but I think that Ottawa (although a very stable and nice city) would not give me a good ROI for my borrowed money.





Is that your dream because you love serving coffee/donuts/sandwich's or because you think it would be the most lucrative investment for you?



Regards,



Michael
 

ottawaman

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Hi Mike, good question! I would say its a lucrative investment since I live in an area in Ottawa, where the houses are booming and walmart is putting up a gigantic superstore. Thats where I plan to place the "franchise"
 

bizaro86

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[quote user=ottawaman]Hi Mike, good question! I would say its a lucrative investment since I live in an area in Ottawa, where the houses are booming and walmart is putting up a gigantic superstore. Thats where I plan to place the "franchise"






I think you'll find it very difficult for a number of reasons to put a Tim Horton's exactly where you want one. However, that isn't to say it's impossible, but you should begin following up with TH's corporate on their requirements ASAP. I would also caution you not to get too attached to the idea.



For example, if you can't get a location you like, don't take one that you don't think will work for you just to get in the game. Also, take inventory of your skills and support system to determine whether you can make this work. How many people could you call to take a shift at the last minute? How many of those people would still talk to you if you called them 5 times in one month?



Regards,



Michael
 

dplummer

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Do both. Buy the Timmies & funnel your profits into real estate.



Doug
 

GaryMcGowan

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This brings to mind what one of our partners said to me. For the last 30+ years he has ran many very succseful multi-million dollar businesses which provided him a great JOB. However at the end of the day his wealth was made from the real estate that those businesses where located on. He is now using that money to live off of and to invest into more real estate.
 

ottawaman

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Michael, Doug, and Gary



Thanks very much for the advices.



Yes I agree that buying a franchise is like buying you a job and that many money can be made on real estate.



I'm 34, and currently own my home (mortgage free), and have 3 rental properties, all located in Ottawa. Although Ottawa is a nice city and the average real estate appreciation is equal or slightly above inflation, there are many competitions or competitors. This makes it hard to maintain a healthy cash flow. Furthermore, with the government cuts looming, real estate maybe headed for a slight depreciation (though it can be good since people will rent again).


Well lets see how it goes`again, thanks for the great advices.
 

Thomas Beyer

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Unlike real estate, franchisees have zero competition and it is a slam dunk, with higher returns, lower risk, less management issues and less work ... Not.
 

distasi

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Interesting post.



I just so happen to operate 4 Tim Hortons/Cold Stone Creamery locations in Regina with my family as well as invest in real estate. As a few people have already mentioned... running a 24/7 restaurant is not a walk in the park! When Tim Hortons is looking for franchisees they are looking for people that are going to be working in the restaurant- not just a money group. They tell you straight up that in the beginning you will be working extremely long days (they aren't lying). There will be times when you get home after a long day and you will get a call at 11pm that your night baker didn't show... guess who is going in for the night bake? This isn't for everyone but once you get the right people in place and develop some outstanding managers... it makes your life that much easier! Tim Hortons franchisees were recently asked that if they could go back to the time when they decided to purchase their first Tims would they do it again? 98% said they would do it all over again!



If we had the option to open up another 4 locations this year we would be crazy not to but that isn't something that we have control of (downside of running a franchise). This is why I have becoming more and more involved in real estate over the last couple years- something I have more control over and grow it as fast (or as slow) as I choose.



Hope this provides a little more insight into the world of coffee and timbits :)



If you have any questions feel free to fire away.





Mike Di Stasi
 

MonteDobson

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[quote user=distasi]
I just so happen to operate 4 Tim Hortons/Cold Stone Creamery locations in Regina with my family as well as invest in real estate.



Mike Di Stasi




Hi Mike, I live in Regina as well. We should get together for a coffee and ice cream one day to discuss real estate and business, etc...you're buying! lol



My contact info is below.



Regards,
 
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